Using Life Insurance to Fund Assisted Living

Assisted living is a compelling option for seniors who can no longer handle every aspect of independent living but who don’t need the heightened nursing and medical attention that a nursing home offers. Moving into assisted living provides respite from home maintenance, assistance with self-care, and a vibrant, social environment that improves mental and physical health.

However, the cost of assisted living, which depends on where a person lives and the level of care he or she needs, can be a burden financially for families who haven’t prepared for it or who mistakenly assume that Medicare covers it.

We all know that we’ll need care at some point, but too many of us fail to plan for it. As of 2012, Less than 3 percent of people had long-term care insurance. However, 62 percent of people have life insurance. Every situation is different, but for many people, it makes sense to essentially sell their life insurance policy to a third party and use the proceeds to pay for long-term care.

How does it work?

A paid-up, in-force life insurance policy has value. There are companies, “life-settlement providers,” that will purchase peoples’ life insurance policies from them. The company agrees at the time of the sale to pay a percentage of the policy’s face value over the course of several months. The total amount paid will be less than the policy’s death benefit, but, if it is a whole life policy, it will be greater than its surrender value.

As the new owner of the policy, the purchasing company takes over payment of the policy’s monthly premium. Also, as the owner, the company will collect the full amount of the death benefit when the original policyholder dies, minus, in some instances, a small allotment for funeral expenses that goes to the original policyholder’s beneficiary.

This process is known as a “conversion.” It converts a life insurance benefit into a long-term care benefit. Such a conversion can be a useful way for someone to unlock immediate cash from a deferred asset, especially in instances when the policy premiums have become burdensome and the policyholder is considering surrendering the policy or canceling it.

Any life insurance policy — whole, term, universal, etc. — is eligible for a life settlement conversion.

What a life settlement isn’t

There are actually several ways to take cash from a life insurance policy to pay for long-term care or medical costs, in addition to life-settlements: viatical settlements and accelerated death benefits.

Viatical settlements are similar in many respects to life settlements, and many people use the terms interchangeably. Both transactions involve selling an insurance policy to a third party that agrees to pay the premiums and collect the death benefit in exchange for an early, partial payout. The difference, however, is that a viatical settlement requires that the seller have a chronic illness or be terminally ill with less than two years to live.

Accelerated death benefits have a similar requirement to viaticals. An accelerated death benefit is a provision, written into some life insurance policies, that lets policyholders who have been diagnosed with a terminal illness begin collecting on the face value of the policy while still alive.

Life settlements do not require any terminal illness diagnosis. However, it does require the need for a long-term care provider because the payments from the life settlement conversion must be paid to a long-term care provider; they can’t be made to the original policyholder.

Advice before buying

As with any financial decision, it’s important to shop around and get more than one quote before selling your life insurance policy. Settlement offers can vary widely. There are also life settlement brokers that work on commission and can shop among many life settlement providers to find the best price.

It’s also important to remember that the payments from the conversion are for a fixed period of time. They are not a permanent solution to a person’s financial needs. But especially in instances where people need money for long-term care for a bridge period — perhaps after someone moves out of their home but he or she call sell the home — a life settlement conversion can be a very useful tool.